FYI: 9th Cir Holds "Reasonably Possible" Punitive Damages Award Supports CAFA Removal

The U.S. Court of Appeals for the Ninth Circuit recently held a defendant that relies on potential punitive damages to satisfy the amount in controversy for removal under the federal Class Action Fairness Act meets that requirement if it shows that the proffered punitive/compensatory damages ratio is reasonably possible.

 

A copy of the opinion is available at:  Link to Opinion

 

On June 11, 2019, a consumer filed a putative class action lawsuit against a motorcycle manufacture in California state court for alleged false advertising and alleged violations of the Consumer Legal Remedies Act (CLRA) among other claims.

 

The consumer sought (1) damages "in an amount not less than $1,000,000 for each year beginning June 11, 2015 and continuing to August 23, 2017," (2) reasonable attorneys' fees under a statutory fee shifting provision, (3) punitive damages, and (4) injunctive relief. Consumer proposed a class of "[a]ll consumers who, for the period beginning June 11, 2015 through August 22, 2017, purchased or leased" from motorcycle manufacture and alleges that the class "likely consists of thousands of members." The complaint also stated that "any applicable statutes of limitation[s] should be tolled and are tolled under governing law."

 

The motorcycle manufacturer removed the case to federal court, invoking federal jurisdiction under the Class Action Fairness Act (CAFA). The manufacturer alleged that the following damages satisfied CAFA's requirement that the amount in controversy exceeds $5 million: (1) at least $2,166,666 in compensatory damages based on the prayer in the Complaint (at least $1,000,000/year from June 11, 2015 to August 23, 2017); (2) approximately $2,166,666 in punitive damages based on a 1:1 punitive/compensatory damages ratio; and (3) $1,083,333 in attorneys' fees, or 25 percent of the total amount in controversy.

 

As you may recall, the CAFA gives federal courts original jurisdiction over class actions that have a class of over 100 members, minimal diversity of citizenship between the parties, and an amount of controversy of more than $5 million.

 

The consumer moved to remand the case back to state court, challenging the manufacturer's punitive damages and attorneys' fees amounts arguing that only the CLRA and fraud causes of action allow for punitive damages, and both have a three-year statute of limitations. In addition, the consumer argued that his punitive damages prayers had to be based on his individual claims ($1,399), not the class claims. Finally, the consumer challenged the attorneys' fees amount arguing that the "common fund" fees come out of the total damages and are not added to the total amount in controversy.

 

The motorcycle manufacturer opposed the motion, attaching (1) evidence that juries had awarded punitive damages above a 1:1 ratio in four prior California CLRA cases and (2) evidence that the consumer's attorney sought attorneys' fees totaling 35 percent of the recovery in a similar class action.

 

The trial court granted the consumer's motion to remand holding that the motorcycle manufactures evidence was insufficient because it made "no attempt to analogize or explain how [the] cases [it cited] are similar to the instant action" and therefore had not established by a preponderance of the evidence that the amount in controversy exceeded $5 million. The trial court also noted that the potential recovery for punitive damages was $1,399 not $2,166,166.

 

The motorcycle manufacturer appealed.

 

The Ninth Circuit began its review by addressing the issue of whether the motorcycle manufacturer met the amount-in-controversy requirement, first noting, to meet CAFA's amount-in-controversy requirement, a defendant needs to plausibly show that it is reasonably possible that the potential liability exceeds $5 million. The amount in controversy is the "amount at stake in the underlying litigation." Gonzales v. CarMax Auto Superstores, LLC, 840 F.3d 644, 648 (9th Cir. 2016) "Amount at stake" does not mean likely or probable liability; rather, it refers to possible liability.

 

The Court noted a defendant satisfies the amount-in-controversy requirement under CAFA if it is reasonably possible that it may be liable for the proffered punitive damages amount. One way to meet this burden is to cite a case based on the same or a similar statute in which the jury or court awarded punitive damages based on the punitive-compensatory damages ratio relied upon by the defendant in its removal notice.

 

The Court acknowledged the motorcycle manufacturer met that burden by citing four cases where juries had awarded punitive damages at ratios higher than 1:1 for claims based on the CLRA. In doing so, the motorcycle manufacturer "relied on a reasonable chain of logic" to assume that a similar amount was at stake here, and "presented sufficient evidence to establish that the amount in controversy exceeds $5 million."

 

The Ninth Circuit rejected the trial court's requirement that a defendant "analogize or explain how [the cited] cases are similar to the instant action" by finding that improperly asks defendants to show the likelihood of the plaintiff prevailing on the punitive damages claim, rather than merely establishing the potential amount "at stake."

 

Next, the Court addressed the trial court's ruling that a potential statute of limitations defense precludes damages for unnamed class members.

 

The consumer argued that under China Agritech, Inc. v. Resh, 138 S. Ct. 1800, 1806–07 (2018) and Fierro v. Landry's Restaurant Inc., 32 Cal. App. 5th 276, 292 (2019), only his individual CLRA and fraud claims could be tolled, and that therefore there was only $1,399 of potential punitive damages.

 

However, the Ninth Circuit stated that in order for the trial court adopt this measure of damages, it would have to assume that the motorcycle manufacturer would prevail on its statute of limitations defense against the rest of the class and thus improperly "decide[d] the merits of the case before it could determine if it had subject matter jurisdiction." Geographic Expeditions, 599 F.3d at 1108.

 

Consequently, the Appellate Court held the trial court erred in considering the merits of manufacturer's affirmative defense to determine the amount in controversy, noting the amount in controversy represents only the "amount at stake in the underlying litigation," not the likely liability which is irrelevant to the amount at stake in the litigation. In sum, "just because a defendant might have a valid defense that will reduce recovery to below the jurisdictional amount does not mean the defendant will ultimately prevail on that defense." Geographic Expeditions, Inc. v. Estate of Lhotka ex rel. Lhotka, 599 F.3d 1102, 1108 (9th Cir. 2010).

 

Accordingly, the Ninth Circuit held that the motorcycle manufacturer "met its burden of showing that the amount in controversy exceeds $5 million under CAFA by establishing that the proffered punitive/compensatory damages ratio is reasonably possible."  The trial court's ruling granting the consumer's motion to remand was reversed.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Mass SJC Holds Debt Collector Cannot Use Arbitration Provision to Thwart Class Action

The Massachusetts Supreme Judicial Court (SJC) recently affirmed the denial of a debt collector's motion to compel arbitration, holding that the defendant had failed to provide "clear and definite" evidence of the parties' intent that it benefit from the arbitration provision at issue.

 

A copy of the opinion is available at:  Link to Opinion

 

In February 2018, the plaintiff rented a car from a car rental company, which the rental company claimed he returned damaged. The rental company charged the plaintiff for repairs, but the plaintiff failed to make any payment. The rental company engaged a debt collector to obtain payment.

 

In his class action complaint, the plaintiff claimed that the debt collector violated the Massachusetts consumer protection statute, Mass. Gen. Law ch. 93A, § 2, and debt collection regulations, 940 CMR §§ 7.00, by making too frequent telephone contact with the plaintiff and other debtors.

 

The defendant moved to compel arbitration pursuant to the Federal Arbitration Act (FAA), citing a binding arbitration provision contained in the plaintiff's rental contract with the rental company, which stated, in relevant part, "Renter and Owner agree to arbitrate any and all claims, controversies or disputes of any kind ("claims") against each other, including but not limited to claims arising out of or related to this Agreement, or owner's…charges…"

 

In denying the debt collector's motion to compel arbitration, the trial court held that the defendant -- a nonsignatory -- was required to present "clear and unmistakable" evidence that the plaintiff had agreed to arbitrate his claims against the defendant, but that the defendant had failed to do so.

 

The Supreme Judicial Court transferred the defendant's appeal on its own motion. The Court noted that, "[i]n the present case, the question is not whether the subject matter of a particular claim falls within the scope of the arbitration provision, but, rather, whether there is an enforceable arbitration agreement between plaintiff and defendant."

 

Because arbitration is a matter of contract, the interpretation of an arbitration provision itself "is generally a matter of [S]tate law." Stolt-Nielson S.A. v. AnimalFeeds Corp., 559 U.S. 662, 681 (2010). The Court noted that, in Massachusetts, there are six theories under which a nonsignatory may enforce a contract, such as an arbitration agreement, against a signatory: "(1) incorporation by reference; (2) assumption; (3) agency; (4) veil piercing/alter ego; (5) equitable estoppel, and (6) third-party beneficiary." Machado v. System4 LLC, 471 Mass. 204, 209-210 (2015).

 

The SJC denied the defendant's claims that it could enforce the arbitration provision in the rental company's contract under the "agency" theory and/or as a third-party beneficiary. In regard to the "agency" theory, the Court noted that "[t]ypically, agents do not obtain rights…from contracts entered into by their principals…" Constantino v. Frecheet, 73 Mass. App. Ct. 352, 358 (2008).

 

The Court further explained that the agency theory could permit a nonsignatory agent to enforce an arbitration provision in a contract signed by a principal, but only in the limited circumstance where the claim against the agent arose "under the contract in question."

 

The SJC held that this limited exception did not apply because the plaintiff was not claiming that the rental company committed a breach of its rental contract with him, asserting any misconduct of any sort against the rental company, nor any breach of the rental contract by the defendant. Instead, his sole claim is that the defendant engaged in unlawful debt collection practices, which were not mentioned anywhere in the plaintiff's rental contract with the company.

 

Moreover, if the defendant had engaged in the alleged unlawful debt collection practices, it would not have been acting within the scope of the work the rental company hired it to do since the service agreement between the defendant and the rental company prohibits debt collection by any means that violate applicable federal and state law.

 

In regard to the defendant's third party beneficiary theory, the Court noted that, under Massachusetts law, a nonsignatory seeking to enforce an arbitration agreement as a third-party beneficiary must point to "clear[] and definite[]" evidence of the parties' intent that it benefit from the provision. Constantino, 73 Mass. App. Ct. at 356.

 

The Court noted that the arbitration provision at issue contained competing language regarding the parties who may enforce it. The second sentence of the arbitration provision stated that "Renter and [rental company] agree to arbitrate any and all claims…against each other[,]" which, according to the Court, suggested that the only claims subject to arbitration are those brought by the plaintiff against the rental company or vice versa. The subsequent sentence, however, contradicts this position by stating that all claims against the rental company's "employees, agents, affiliates or representatives" are also subject to arbitration.

 

Another section of the arbitration provision contains no mention of third parties, providing that arbitration may occur "if [the rental company] and [the] Renter" fail to resolve the dispute within 30 days, and provide an allocation of arbitration costs between the rental company and the plaintiff.

 

In light of the competing provisions, the SJC held that reasonable minds could differ as to whether the arbitration provision is applicable to claims brought against the defendant. Thus, because the arbitration provision is susceptible to multiple interpretations, it is, at a minimum, ambiguous as to whether the defendant could enforce it. Therefore, the Court held that the defendant failed to put forth the "clear and definite" evidence necessary to show it was entitled to enforce the arbitration provision as a third-party beneficiary.

 

Accordingly, the order denying the defendant's motion to compel arbitration was affirmed.

 

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Ill App Ct (1st Dist) Holds Borrower Barred from Challenging Foreclosure After Vesting of Title in Third Party

The Illinois Appellate Court, First District, recently held that a homeowner was barred from challenging a foreclosure where the deed to the property had vested to a third party.

 

A copy of the opinion is available at:  Link to Opinion

 

A mortgagee filed a foreclosure against a homeowner, a default judgment of foreclosure was entered, and a judicial sale was noticed for August 2018. The day before the sale, homeowner through counsel filed an emergency motion to stay the sale arguing he was under a loan modification with the mortgagee. The mortgagee voluntarily rescheduled the judicial sale for September 2018, and homeowner withdrew his motion.

 

Just before the September sale, homeowner filed a pro se motion to stay the sale which was granted and the sale was stayed until at least November 9, 2018.  The property was later sold to a third-party bidder for in June 2019.

 

On June 12, 2019, the homeowner filed an emergency motion to stay and vacate the sale, arguing that he believed he was in a modification agreement with the mortgagee who had allegedly been accepting his monthly mortgage payments.

 

On June 21, 2019, the third-party bidder filed a motion to confirm the sale. At the hearing on the motion to confirm the sale, the homeowner's motion to vacate and homeowner's counsel's appearance, as well as the third-party bidder's motion, were stricken.

 

In July 2019, the mortgagee filed a motion to confirm the sale. In response to the motion, the homeowner through counsel asserted that the sale should not be confirmed under the "justice was not otherwise done" clause of section 15-1508(b)(iv) of the Illinois Mortgage Foreclosure Law.

 

As you may recall, under the Illinois Mortgage Foreclosure Law (IMFL), the trial court shall confirm the sale of the property unless it finds that one of four grounds exist to disapprove the sale: "(i) a notice required in accordance with subsection (c) of Section 15-1507 was not given, (ii) the terms of sale were unconscionable, (iii) the sale was conducted fraudulently, or (iv) justice was otherwise not done." 735 ILCS 5/15-1508(b); Mortgage Electronic Registration Systems, Inc. v. Barnes, 406 Ill. App. 3d 1, 4 (2010). The IMFL expressly provides that when "shall" is used, it means that something is mandatory and not permissive. 735 ILCS 5/15-1105(b).

 

In support of his motion, the homeowner argued that he had applied and was approved for a trial payment plan which he completed. Further, he signed and retuned the final modification agreement to the mortgagee and made two payments pursuant to the agreement before the third was returned.  The homeowner attached an unsigned copy of the trial period plan offered by bank but no affidavit was attached to the homeowner's response.

 

The mortgagee acknowledged that the homeowner made all the required payments under the trial payment plan but maintained the final modification agreement was never signed and returned, which allowed mortgagee to proceed with the judicial sale. No affidavit was attached to mortgagee's reply.

 

The homeowner appeared pro se at the hearing on the motion to confirm the sale, as his counsel had withdrawn from the case. There was no record of proceeding on the hearing for the motion to confirm the sale. However, the trial court allowed the homeowner to enter into the record a handwritten letter that provided background on his ownership of the property and his desire for a loan modification.

 

The trial court entered the order approving the sale providing for a $24,598.35 surplus which did not appear to include any credits for the payments made by the homeowner during and after the trial payment period.

 

The homeowner appealed.

 

Initially, the Appellate Court rejected the mortgagee's argument that the lack of a report of proceedings of the hearing on the order approving the sale requires the Appellate Court to presume that the trial court's order had a sufficient factual basis and that it conforms with the law. The Appellate Court found that the parties' arguments on appeal are substantially similar to those presented to the trial court and the documents attached to those pleadings presented for consideration are the same.

 

On appeal, the homeowner argued that the trial court erroneously confirmed the sale of the property where justice was not otherwise done under section 15-1508(b)(iv) of the IMFL.  Mortgagee responded that section 15-1508(b)(iv) is inapplicable to situations involving loan modifications.

 

The Appellate Court began its analysis noting that the Illinois Supreme Court has explained that a borrower seeking relief under section 15-1508(b)(iv) must demonstrate "either the lender, through fraud or misrepresentation, prevented the borrower from raising his meritorious defenses to the complaint at an earlier time in the proceedings, or the borrower has equitable defenses that reveal he was otherwise prevented from protecting his property interests." Wells Fargo Bank, N.A. v. McCluskey, 2013 IL 115469, ¶ 26.

 

The parameters for what constitutes an injustice under section 15-1508(b)(iv) according to McClusky, "[appear] to merely codify the long-standing discretion of the courts of equity to refuse to confirm a judicial sale" noting this discretion " 'must be exercised in accordance with established principles of law' " and cannot be used to protect an interested party " 'against the result of his own negligence.' " McCluskey, 2013 IL 115469, ¶ 19.

 

Furthermore, the Illinois Supreme Court also acknowledged that the statutory framework of the IMFL reveals that "once a motion to confirm the sale under section 15-1508(b) has been filed, the court has the discretion to see that justice has been done, but the balance of interests has shifted between the parties. At this stage of the proceedings, objections to the confirmation under section 15-1508(b)(iv) cannot be based simply on a meritorious pleading defense to the underlying foreclosure complaint." McCluskey, 2013 IL 115469, ¶ 25.

 

"To vacate both the sale and the underlying default judgment of foreclosure, the borrower must not only have a meritorious defense to the underlying judgment, but must establish under section 15-1508(b)(iv) that justice was not otherwise done because either the lender, through fraud or misrepresentation, prevented the borrower from raising his meritorious defenses to the complaint at an earlier time in the proceedings, or the borrower has equitable defenses that reveal he was otherwise prevented from protecting his property interests." Id. ¶ 26.

 

The Appellate Court found that here, homeowner "is not asserting that [the mortgagee] prevented him from raising a meritorious defense to the complaint but maintains that he was prevented from protecting his property interests where he had entered into a final loan modification agreement with [the mortgagee]."

 

The question unanswered was "whether the signed, final loan modification agreement was sent by [homeowner] and whether any error on the part of [the mortgagee] contributed to the failure of the final loan modification agreement from being executed." Accordingly, confirming a judicial sale where such an agreement was in place would be inequitable and would arguably fall within the "justice not otherwise done" clause of section 15-1508(b)(iv).

 

The Appellate Court observed that where, as is the case in the present matter, there is a question as to whether the parties entered into a loan modification agreement, the equitable result is to, at a minimum, conduct an evidentiary hearing on the issue. Neither the homeowner nor the mortgagee provided affidavits to authenticate their positions as to the status of the loan modification.

 

Accordingly, the proper course of action here would have been for the trial court to conduct an evidentiary hearing regarding the status of the homeowner's loan modification prior to confirming the sale.

 

Furthermore, the Appellate Court next noted that "[d]elivery of the deed executed on the sale of the real estate *** shall be sufficient to pass the title thereto." 735 ILCS 5/15- 1509(b) and any vesting of title by deed pursuant to section 15-1509(b), unless otherwise specified in the judgment of foreclosure, "shall be an entire bar of (i) all claims of parties to the foreclosure and (ii) all claims of any nonrecord claimant who is given notice of the foreclosure." 735 ILCS 5/15-1509(c).

 

The Appellate Court noted that here, the deed conveying title to the property was executed following the confirmation of the sale and recorded by the Cook County Recorder of Deeds on October 9, 2019. Pursuant to section 15-1509(c) of the IMFL, the title to the property has vested by deed to a third party and, therefore, "all claims of the parties to the foreclosure" are barred. Accordingly, pursuant to section 15-1509(c), the Court held that it was precluded from vacating the order approving the sale in this case as it pertains to homeowner's loan modification argument. See 735 ILCS 5/15-1509(c).

 

Next, the Appellate Court examined the homeowner's challenge to the amount of the surplus awarded in the order approving the sale. The mortgagee argued that the homeowners forfeited his argument by failing to raise the issue before the trial court.

 

The Appellate Court acknowledged that issues not raised in the trial court generally are forfeited and may not be raised for the first time on appeal. Village of Lake Villa v. Stokovich, 211 Ill. 2d 106, 121 (2004). The forfeiture rule, however, is an admonition to the parties and not a limitation on the jurisdiction of this court. Pennymac Corp. v. Jenkins, 2018 IL App (1st) 171191, ¶ 23.  An appellate court may overlook forfeiture where necessary to obtain a just result or maintain a sound body of precedent. Id.  Accordingly, where it is possible that the homeowner paid the mortgagee upwards of $7,800 toward his mortgage obligation that was not accounted for, the Court chose to excuse the homeowner's forfeiture in order to obtain a just result.

 

Finally, the Appellate Court noted an exception to the bar presented by section 15-1509(c) referenced earlier, exists if there is a dispute involving the surplus proceeds from the sale. Brewer, 2012 IL App (1st) 111213, ¶ 15; 735 ILCS 5/15-1509(c). Here, homeowner was separately disputing the amount of the surplus provided in the order approving the sale, and therefore, this exception applied. The Appellate Court recognized neither party had presented competent evidence as to the exact amount of funds paid and allocation of those funds, but held that there was sufficient evidence in the record to warrant a hearing regarding the proper amount of the surplus.

 

Accordingly, the Appellate Court affirmed the judgment of the trial court, confirming the sale of the property, and remanded the matter for further proceedings regarding the amount of the surplus.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia  |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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and

 

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